That's how most people still imagine banking works, even today. The banks
hope to profit simply by charging more on their loans than they pay out to
cash depositors. The art (or science) comes in choosing only the most credit-worthy
borrowers, or adjusting the interest rate charged to higher risk debtors accordingly.

A collateral claim on the borrower's assets would add further protection.
But such a simple business - safeguarding one person's cash and making a profit
by lending it out to somebody else - just wasn't enough to turn a profit on
the greatest bubble in money ever seen.

Indeed, it now looks naive, if not stupid. Far better to lend money and then
securitize that debt, selling it to someone else and leaving them to worry
about the risk of default. The sale returns to the bank the same sum of cash
that it first lent out. And that enables the bank to make a fresh loan once
more...before securitizing it...selling it as an asset...and raking back the
money yet again...ready for fresh lending...securitization...bond sale...clawback...and
lending in turn.

The idea of risk to the bank hardly enters the equation. Judging the risk
to those institutions who buying the securitized debt can also be outsourced,
as well. Step forward Standard & Poors, Moodys and Fitch with their pro-forma
rating applications. Tick the right boxes when creating your next securitized
debt product, and the ratings agencies will make selling it a cinch.

"If I buy a 24 carat gold ring," asks the anonymous London hedge fund manager
behind FinTag.com, "I expect it to be pure 100% gold. If I buy into a triple
A-rated bond, I expect the underlying to be triple A too.

"So why are the rules different for Asset Back Securities? The JP Morgan
Chase Commercial Mortgage Securities Trust, 2007-LDP11 is made up of commercial
property underlying assets based in New York, Florida and California. It consists
of 25 tranches of differing quality, yields and risk. The trust has a notional
amount of over $5 billion and nine of the tranches, which can be bought as
separate notes, have been designated by Moody's and S&P the top grading
of Aaa and AAA respectively. This accounts for 86% of the portfolio. The other
15 tranches are less than triple A and mostly of junk status.

"[Yet] the total portfolio has been designated triple A status. This is the
equivalent of my gold ring containing 14% tin, but still being sold as 24 carat."

Catching a nasty rash off the base metals in your wedding ring is one thing.
Spotting junk-rated debt in your AAA-rated mortgage bonds is now proving more
than itchy.

"We feel terrible in that investors have lost money," said Greg Barr, a Standard & Poors
analyst who helped rate the credit-worthiness of Basis Capital's Yield Fund
in Australia, to The Australian newspaper earlier this week.

"We do our best in terms of getting the ratings right," he went on, practically
begging to be sacked by the time he got back to the office. "This one has turned
out differently to what we expected."

S&P had a five-star rating on the Basis Yield Fund, reviewed and confirmed
last November. The fund just told its investors that they lost 13.7% of their
money last month alone. "It is believed to have sunk significantly further
since," says The Australian. And without credit-derivative hedge funds standing
ready to buy up securitized debts, let alone mortgage-backed bonds, suddenly
the banks are forced back into the business of judging risk for themselves
and keeping the debt on their books.

The impact on global asset values - from housing to equities, emerging markets
to fine art - is already proving dramatic. Spending on mergers and acquisitions
in the US stock market rose to a record total of $1.1 trillion during the first
five months of this year. Globally, a full 78% of all corporate deal-making
was paid for in debt, most typically corporate debt sold onto the bond market.

And now?

"Cadbury Schweppes could be forced to delay or even abandon the multi-billion-pound
sale of its US drinks arm," reports The Times in London.

"Chrysler Group became a signpost for the high-yield-debt market's strain," says
the Wall Street Journal, "as bankers for the ailing auto giant postponed a
$12 billion sale of debt to investors as part of a buyout."

"Concerns are growing that this year's $200bn pipeline of new leveraged loan
sales could be hamstrung by credit market conditions and lack of investor appetite," adds
the Financial Times.

"More than 40 companies worldwide reorganized or abandoned bond offerings
in the past three weeks," says Bloomberg. "The retreat forced banks to take
on at least $32 billion of debt they would have otherwise sold."

The sad tale of Alliance Boot's ailing buy-out puts the case in a neat little
package. The giant British pharmacy group was only formed last July from the
merger of the two market leaders. It was then bought out by the deputy chairman,
Stefano Pessina, and US private equity firm Kohlberg Kravis Roberts at the
end of last month.

Following the usual route to taking high-value listed assets off the stock
market, KKR and Pessina didn't actually have the £11.1 billion ($22.2
billion) they needed to complete the purchase. Instead, they planned to load
Alliance Boots up with debt to pay them for the pleasure of owning it.

Now the credit cycle has turned with a vengeance, however, and so KKR was
this week forced to offer higher interest payments on a good chunk of the £9
billion ($18 billion) debt package it still needs to float. The underwriting
banks - Deutsche Bank, J.P.Morgan and Unicredit - have managed to syndicate
only a small portion of the outstanding debt they're now owed, leaving £7.25
billion on their own books, awaiting sale once the credit market settles down.
Here's hoping it does. Soon.

Step back to look at what this little hiccup in the short-term, and that's
$14.5 billion that those banks now can't offer to underwrite new leveraged
buy-outs. Until the Alliance Boots debt can be syndicated, it's also $14.5
billion that the underwriters themselves have effectively loaned to KKR. This
was never the plan, but it's a lot like the standard banking business that
most people, if asked, would say banks are there to provide. It's also a clear
consequence of the credit crunch spreading out from the US subprime mortgage
sector, led by the collapse of Bear Stearns highly-geared mortgage-derivative
hedge funds in June.

With credit and cash liquidity now drying up fast outside the government bond
market - where buyers assume the risk of default equals zero, of course - Treasuries
have put in their best weekly performance since last summer, driving the 10-year
US bond yield down to 4.77% from a peak above 5.30% only last month.

Nor is gold immune to this apparent "flight to safety". Sinking nearly $20
per ounce from its top of earlier this week, gold has been pulled lower by
the rush of money exiting all so-called "risk assets". Only the largest national
governments look a safe bet right now, according to the market at least.

If old-fashioned banking continues to grow, get ready for further falls in
equities, corporate bonds, emerging markets, higher-risk currencies and perhaps
commodities. If the market suddenly starts questioning the true value of Treasury
debt, expect gold prices to turn tail and start moving higher as all other
asset classes become certain losers.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.